Since 1960, the Asian country has starred in one of the most successful and sustainable growth processes in all of history, giving rise to what many call the Korean economic miracle.
In previous posts we have discussed and discussed South Korea’s success in minimizing the economic impact of the COVID-19 pandemic.
A few weeks ago, our statements were supported by data published by the Bank of Korea, which has quantified the decline in gross domestic product (GDP) in the year 2020 as a mere 1%. South Korean monetary authority for 2021 are also positive, predicting growth of around 3% this year.
In view of these data, it is worth wondering if the success of South Korea is due to specific measures or structural factors of an economy that already has long experience in overcoming difficulties. In fact, the Asian country has starred, since 1960, in one of the most successful and sustainable growth processes in all of history, giving rise to what many call the Korean economic miracle. In this article we will analyze its characteristics and its possible influence on current success in the face of the pandemic.
From poor to rich
«The 1960s witnessed the creation of the chaebols. In other words, large private conglomerates, supported by the State, which group companies engaged in very diverse activities.
In the 1950s, South Korea experienced a harsh civil war aggravated by the intervention of foreign powers, turning the country into one of the main battlegrounds of the Cold War.
The conflict ended with an armistice in 1953, which divided the Korean peninsula into two republics, the northern one, under Chinese and Soviet influence, and the southern one, under United States military protection. Naturally, these divergent political trends quickly translated into opposing economic policies: while the northern republic embraced communism, the southern republic became one of the best examples of 20th century capitalism.
It should be remembered that the situation in South Korea in the 1950s was very precarious, given that its traditionally rural economy had been devastated by the Japanese occupation and later by the civil war. Added to this was the inheritance of an industrial activity and the extraction of raw materials aimed at Japan’s military needs that had not existed since the end of the Second World War. Neither did agricultural price controls or the policy of protectionism in the industry help. In this context, one of the few positive elements was financial aid from the United States, which, in any case, was much lower than that received by European countries through the Marshall Plan.
The 1960s witnessed the creation of the chaebols. In other words, large private conglomerates, supported by the State, which group companies engaged in very diverse activities. At present the chaebol best known is Samsung, but others such as Hyundai, LG and SK Group also stand out. From then on, the chaebols They have been the protagonists of South Korea’s industrial growth, placing themselves at the forefront of technological progress and constituting one of the main sources of skilled job creation in the country.
Starting in the 1970s, the South Korean economy began to take off, beginning a growth cycle that, despite occasional interruptions, has lasted to this day. Price controls and protectionism have since been abandoned, while freedom in business, finance and employment has been encouraged. All of this has turned South Korea into an economy open to the world, increasingly focused on industrial and technological exports.
The result is evident: if in 1960 its GDP per capita was just $ 932.04 (below Nigeria, for example), in 2019 it had grown to 28,675.03 (in 2010 dollars, according to World Bank data) . In purchasing power parity the data is even better, with a per capita income of USD 42,764.53.
The contrast with North Korea’s secular stagnation is stark and has been echoed numerous times by the media. So, instead, we will compare the growth of South Korea with that of one of the largest economies in the world: France.
Tale of two countries
“Higher investment rates may explain rising worker productivity, which often results in more competitive exports and higher wages.”
As we can see in the graph above, the GDP per capita in South Korea has grown at a much higher rate than that of France in recent decades. It has also shown a much higher capacity to react to crises (1998, 2009). In fact, if this trend continues, it is possible that in a few years the South Korean income per capita will be higher than the French one.
So, how can we explain this divergence between two countries, one of them being the richest in the world?
In principle, both economies are open to foreign competition. Korea is very oriented towards its partners in the Pacific, while France is integrated into an extensive free trade area such as the European Union. In fact, the weight of exports over GDP is very similar in the two countries.
Also, it should be noted that, in both cases, we are talking about market economies, with high rates of human development and that, in order to grow, they have opted to support large business groups from the State. However, despite these similarities, the results have been very different.
According to the indices of economic freedom published annually by the foundation Heritage, South Korea and France enjoy similar freedom in the money market, in the financial sector and in respect for property rights. However, the Asian country is freer in terms of the labor market, the possibility of doing business and the arrival of investments, in addition to having a smaller State. Which translates into a lower tax burden for the private sector.
On the other hand, if we look at the World Bank data, we see that, since the mid-1970s, the South Korean economy has given a greater role to investment than its European counterpart. Naturally, higher investment rates can lead to increasing worker productivity, which in turn tends to lead to more competitive exports in the world and higher wages. Undoubtedly, this is one of the factors that can explain the greater dynamism of South Korea with respect to France, but not the only one.
The importance of saving
“South Korea is an example of how an economy based on savings can generate sustainable growth over time and constantly increase the quality of life of its citizens without having external debt problems.”
The aforementioned, it should be noted, occurs for two reasons: first, a high investment only makes sense if it is directed to the production of goods and services that are actually demanded by society. The best way to ensure this is that the beneficiary companies are subject to international competition and, in this way, a hypothetical lack of competitiveness may be exposed.
It is the case of chaebols in South Korea, initially supported by the state, but promptly forced to compete with the rest of the world. The opposite has happened in France, where governments have injected money into numerous companies oriented to the national market (where they have little competition) and, today, many of them remain in deficit.
The second reason is that an increase in investment can lead to an equivalent growth in external debt, and this can lead to a serious problem if investments are not directed to profitable projects. In this case, both countries have very similar levels of foreign direct investment (FDI), which belies the objection that South Korea’s growth is due to financial aid from the United States.
Quite the contrary. As we can see, the main reason that South Korea can enjoy higher investment rates is savings. Motivated, in part, by a more austere culture in consumer habits and, also in part, by more balanced public finances. And the truth is that the superior saving capacity of South Koreans (even having an income lower than that of the French) has been able to generate large surpluses of resources that the financial system constantly reallocates towards productive activities.
Therefore, South Korea is an example of how an economy based on savings can generate sustainable growth over time, while constantly increasing the quality of life of its citizens without having external debt problems. On the other hand, and contrary to what is repeated on so many occasions, the stagnation of France demonstrates the failure of economies that are increasingly betting on consumption and debt to boost growth.
Thus, this analysis, perhaps, can help us understand that it is saving in conditions of freedom, and not the constant recourse to debt, that allows economies to recover from crises and emerge stronger. In addition, it also teaches us how there are cases in which investments by the State can have very good results if they are selected properly.
South Korea proves it every day, as its economy continues in an unstoppable race that began in the 1960s and that, until now, not even the COVID crisis has been able to stop.